“The Top 5 reasons for business failure are ‘financial’ “(Jessie Hagen, US Bank).
“The No. 1 risk to any start-up is running out of money” (Asheesh Advani, CEO of Covestor. Founder of CircleLending, which was acquired by Virgin).
Most entrepreneurs will fund the early stages of a company’s development with their own funds as well as from friends and family. It is common for start-up businesses to opt for “bootstrap” funding (i.e. methods like minimizing costs by working from home, keeping a “day job” going to pay the bills) to fund the development of initial prototypes and build initial evidence of product demand – generally essential prerequisites to approaching outside investors.
However as the business seeks to grow it will likely need to find external sources of funding and the ability to effectively plan the future financial needs of the company plays a huge part in how much capital can be raised. Knowing the type, amounts & time-scales for capital needed is essential in determining the best source of funding and is also vital for founders to understand the pros and cons of each type of funding. It can be challenging to sort through the many funding options available to determine which are right for you, when and why.
Regardless of the source of funding, anyone ‘putting money’ into your company will want to make sure that they are going to get a good return on their investment and will therefore rigorously assess all the risks involved. In particular it is essential to articulate the full lifetime funding needs of the company, and demonstrate a realistic Exit Strategy.
The amount of detail and preparation needed is therefore significant, regardless of the amount of outside capital you hope to secure. Getting ready for any type of assessment process (loan or grant application, due diligence, etc) is essential because funding will only be given when you meet their criteria and can convince them your company has excellent prospects for success and a clear exploitation route to market. Being “Investor Ready” takes time and significant advice, but is essential. Often as few as 20% of applicants for funding even make it to an initial meeting, because their documentation clearly demonstrates they simply do not understand the needs of investors, or they fail to show a good investment case.